CHICAGO—Investors across the country and from around the world continue to find Chicago one of the most attractive markets in the US. That was proven yet again this week when Heitman bought 353 N. Clark St., a 46-story tower in the River North neighbourhood, after beating out a crowded field of investors. Cook County property records show that the company paid the seller, Tishman Speyer, $715 million for the 1.2-million-square-foot property, or roughly $609 per-square-foot, the second-highest ever paid for a Chicago office building.
“We had tremendous interest in this sale,” Nooshin Felsenthal, senior vice president, JLL, tells GlobeSt.com. She and international director Bruce Miller represented the seller in the transaction. Although Felsenthal can't disclose how many groups put in serious bids, she does say that heavy interest came from both domestic and global investors. The reason for much of that interest is simple. “It's among the best buildings in the market and it sits in the most sought-after submarket.”
The building's tenants include Mesirow Financial, Jenner & Block, Spencer Stuart and Intercontinental Exchange. It was completed in 2009, making it and its neighbour, 300 N. LaSalle, among the last trophy office properties built before the economy cratered. The latter tower recently sold for $850 million, or about $654 per-square-foot, still a record for the city.
“Chicago has certainly been on the rise for the past several years,” Felsenthal adds, but the lack of new supply should continue attracting deep-pocketed buyers to the downtown office market. In a typical decade, developers would add roughly 21-million-square-feet of new office space, but in this decade, she expects that number to shrink to just three. “That 85% to 90% drop-off is the largest we've ever seen.”
However, a constriction in new supply would not mean much to investors unless the CBD was generating the demand needed to fill up the existing space. But the tech sector has helped Chicago reach the tipping point. “It's really moving this market,” Felsenthal says. Motorola Mobility, for example, chose to settle in the Merchandise Mart, and Gogo Inc., recently decided to leave its suburban Itasca headquarters for 232,000-square-feet at 111 N. Canal St.
In the past few years, she adds, tech entrepreneurs increasingly choose to start their businesses in Chicago rather than go to one of the coasts. The importance of 1871, the tech incubator in the Merchandise Mart, should not be underestimated since landlords expect it to eventually provide a new generation of tenants.
And even though the Chicago tech scene was for years overshadowed by its far better-known counterparts in Silicon Valley and Boston, that may have changed. “It's partly Chicago's own fault that it had never developed the technological ecosystem that has now been established.”
But the promise of high-tech is only one piece in the puzzle. The entire downtown should continue to benefit from the overall trend of urbanization, which has many companies, even more traditional ones, looking to establish offices in the CBD in hopes of attracting the millennial employees who reject the suburban lifestyle. Discover Financial Services, for example, which continues to occupy 601,578-square-feet in suburban Riverwoods, recently established a satellite office in 26,000-square-feet at the Apparel Mart. Even McDonald's, an Oak Brook, IL-based company heavily identified with suburban office culture, recently established an outpost in River North. “That's extremely telling,” Felsenthal says. “They're really like everyone else; they need a CBD presence.”
As a result of all these factors, “we're seeing demand we hadn't seen in previous market cycles.” And even though the competition among potential buyers has driven down cap rates, she says that the city's office properties still offer higher yields than similar properties on the coasts, and that should keep both domestic and foreign investors bullish on Chicago for many years to come.
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
